Bubble Meter is a national housing bubble blog dedicated to tracking the continuing decline of the housing bubble throughout the USA. It is a long and slow decline. Housing prices were simply unsustainable. National housing bubble coverage. Please join in the discussion.

Wednesday, June 23, 2010

Economic activity shifting from construction to manufacturing

There's a sharp divergence emerging in the U.S. economic recovery, with housing stumbling and the industrial sector booming.

Ground-breaking for new homes and applications for building permits both plunged last month, as a popular set of tax breaks designed to stimulate home buying expired. The pullback is a worrisome sign that the recovery could face setbacks as the props for demand implemented during the depths of the recession are removed.

Meanwhile, the U.S. industrial sector is providing an unexpected degree of support to growth. Industrial production—the output of factories, utilities and mines—rose 1.2% in May, compared with the month before, the Federal Reserve said on Wednesday, as global demand for a wide range of U.S. goods continued to grow.

"What's taking place is a change in the sources of U.S. growth," said Joe Carson, an economist at AllianceBernstein. Demand for housing used to lead the economy into recovery, he said, but now global demand, particularly from emerging economies like India, Brazil and China, is helping bolster U.S. growth.

Free Marketers argue that in order for the economy to recover from a recession, it is necessary for the economy to shift away from the sectors of previous over-investment toward other economic sectors. This appears to be happening. (Compare this with politicians' inclination to pour money into the declining sector.)

20 comments:

Thanks Bryan.....as long as this credit is as tight as it is the housing market will suffer no matter how much better the rest of the economy is in manufacturing or any other sector. That will only enhance the the alternative "owner finance" market and the rental markets we serve!

I'm not sure if credit is tight or we've just run out of qualified borrowers...that's different from the 70s when interest rates and credit were insanely high/tight. This will help rentals, but it will not increase the alternative financing market.

@Anon - I think the much more interesting numbers are the MBA purchase applications index. The "weasels" seem more concerned with arguing that "protected" gentrified markets close in (ie, existing home sales) are stable. But, I say: here comes the double-dip, and it will affect the "downtown" urban DC market.

@partisan(lurking) - I am trying to get some numbers out of the BLS data to better characterize the income picture inside DC proper. I believe they will bear out my argument that we've run out of qualified gentrifiers. If so, I'll give you a bet for the timing and the index.

All of that forward demand is exhausted. It's funny how things have changed. You acutally need a job to buy a home these days. There is no one left on the fence. Most people capable of purchasing a home have made the purchase. Now it will be trickle demand. Expect more realtors to head back to school for another career.

"Free Marketers argue that in order for the economy to recover from a recession, it is necessary for the economy to shift away from the sectors of previous over-investment toward other economic sectors."

This isn't a belief specific to free marketers. I think its pretty widespread belief that at least in some recessions economic investment needs to shift. The difference, i believe, is that free marketters believe the best way to accomplish this shift it without any government intervention to alleviate economic pain during the recession/transition period or to enact any policy which would encourage such a shift. In fact, hayek would say its government intervention of any sort leads directly to over investment and bubble. This is where i disagree. The idea that "government" can't intervene effectively and only the magic "smart money" of the private sector can effectively create useful change is ridiculous. One might argue that government in many cases is not as good at it as private sector actors. But in other cases, givernment is better. An obvious example is the highways system. No private actor is going to invest in a national road system because the capital cost is too high, doing it piece-meal with lots of little investors is innefficient and uncoordinated, the time horizon for a profit is long and risky, and a number of other reasons. The smart money would never build a national highway and road system, but i would argue that its critical to private industry's success and the general public's life.

Rates are at historical lows and prices of homes are still going down. I thought when mortgage rates go down prices go up. But that's not the case. There is no rush to buy a home because for the next ten years home prices will be flat!

This is not a DC-focused blog. It is a U.S.-focused blog. I do occasionally post DC-oriented stuff because a plurality (but not a majority) of readers are from the Washington, D.C. area. I too am from the D.C. area, but I rarely read local news.

As David wrote in the blog description several years ago, this blog has "National housing bubble coverage, with special attention to the Washington, DC area housing bubble."

I love these Realtors who spend their time trying to influence people's minds that it's safe to buy now. Buy now so I can make my commission on you...sucker! Ignore those tiny bedrooms and the old roof you will have to replace. It's about me and my commission. Don't worry, I'll bring some cookies I purchased from Giant to your closing. Just buy the darn home and stop asking questions!